Coin Portfolio Outpaces Stock Performance|
September 25, 2008
For some 30 years, this is the season to look back on a market basket that gave important, symbolic meaning to the rare coin market and set coin investment aside as a growth industry. In the process, it attracted Wall Street to rare coins as an alternative investment vehicle.
Newsflash that a market basket had been established by the white shoe investment banking firm of Salomon Brothers came in 1978. The tip-off came when the economic review publication of the Federal Reserve Bank of Boston published an academic article calling attention to an annual study being prepared under the aegis of R.S. Solomon, a managing director of the firm looking for new investment vehicles.
Salomon was looking at stock and bond prices - the Dow Jones industrial average had gone from 831 in 1977 to 816 in 1978, then up to 839 the following year - and sensing that there had to be investment vehicles that made better rates of return than a then-stagnant market.
Rare coins were coming into their own as an investment vehicle; there were some SEC filings for limited partnerships. There was also a push from larger firms who outreached to collectors with telemarketing. There was a lot of direct mail that was geared toward a program of investing in numismatic product.
Numbers helped this decision along. As the Dow stood stagnant, Standard & Poors confirmed was at 107 in 1976, went down to 95.1 in 1977, saw a modest gain to 96.11 in 1978 and finally got back to 107.94 in 1979. But how did other areas do during that time frame, and why coins?
R.S. Solomon created an investment analysis model using a small number of just 20 silver and copper coins, some proof-63 but mostly choice uncirculated specimens. (No gold was included because investment was too new - not until Dec. 31, 1974, was private gold ownership permitted in the U.S. after a shut-down of more than 40 years.
Surprising results when 20 coins were factored into a portfolio: it outpaced the equities market. Using the same 1976 starting point, it would have cost about $33,000 to assemble a holding of each of the coins. The following year, 1977, showed a 5.61 percent gain. Not rocket gains, but when measured against a flat market, impressive. The following year, a 4.17 percent gain and in 1979, the portfolio acquisition cost jumped to $43,000 and a gain of more than 19 percent.
In the short span of three years, an average exceeding 8 percent annually was achieved.
A couple of things are remarkable about the coins chosen for the market basket portfolio. First, none are major rarities. Second, nearly all are in choice (MS-63) condition; a few are brilliant (MS-63) proofs. An early copper half cent is XF. They are not completely interchangeable generics, but each could find a ready substitute that would be an equivalent:
The market basked contains:
1. 1794 Liberty cap half cent, extremely fine
2. 1873 2 cent piece, brilliant proof
3. 1866 5 cent nickel with rays brilliant proof
4. 1862 3 cent silver B.U.
5. 1862 half dime B.U.
6. 1807 draped bust dime B.U.
7. 1866 liberty seated dime B.U.
8. 1876 20 cents B.U.
9. 1873 arrows quarter B.U.
10. 1886 seated quarter B.U.
11. 1916 quarter B.U.
12. 1815 bust half uncirculated Uncirculated
13. 1834 bust half B.U.
14. 1855-O seated half B.U.
15. 1921 Walking Liberty half B.U.
16. 1795 draped bust dollar B.U.
17. 1847 seated dollar B.U.
18. 1884-S Morgan dollar B.U.
19. 1881 Trade dollar proof
20. 1928 Hawaiian commemorative half dollar
(The contents of the portfolio was never revealed by Salomon but was revealed in a book by Hans M.F. Schulman and Neil S. Berman in 1986. Coin & Currency Institute published a new analysis by Berman and Silvano DiGenova in 2007.)
Farmland value is used as a comparison. According to Mike Duffy, the chief professor who measures it at Iowa State University farmland was going for over $3,900 an acre by the end of 2007. On July 6, 2008, Duffy gave me an estimated figure of $4,500 - showing a 26 percent increase (2.2 percent monthly).
Gold was figured at $661.50 last year - it went to $931 this year and retreated into the $850s. Silver was figured in the mix at $12.69, a steady price rise since 1999 that just kept going. The other big precious metal, platinum, was figured at $1,307 an ounce last fall - when I started charting this summer, the figure was $2,001. (For the purist, silver gave a rate of return of 42.79 percent; platinum's $700 gain turns out to be a 53.1 percent change.)
The CPI (Consumer Price Index) showed inflation averaging about 3.43 percent annually in late fall 2007; it was at about 208 on the 1982=100 scale. It was at 216 in May, and on Sept. 16, 2008, edged still higher to 219.08, according to the Bureau of Labor Statistics.
Okay, I bet that by now you want to know about where coins stand in all this. First, a word about the portfolio that has been averaging a 12.4 percent rate of change since 1928 - and about 9.65 percent annually since 1965. (The Dow during the same period averaged about 7.21 percent using year end numbers as a basis for the average from 1928 to date.)
Components of the Dow Jones have changed during the period (though the results have not); thus, AIG insurance was removed on Sept.18, 2008, and replaced by Kraft. Phillip Morris (which Kraft used to be a part of) acceded to Chevron.
For the analysis that follows, the Salomon Brothers raw data was not used, but instead, both back (older) and forward (future) pricing was independently examined. Coin grading changes over the years are taken into account. The coins, with the exception of a high-end circulated early American copper are either choice uncirculated or proof (about MS-63 or proof-63 on the numerical grading scale); if higher grades were utilized, such as a MS-65, the results would be substantially higher.
In fact, Dennis Baker, whose NumisMedia has supplied me with working data for the past six or seven years, has also included MS-65 data so I can compare the two. It is so off-the-chart as to make the comparisons ridiculous. Besides, broad based market purchase of MS-63 are possible; by their nature, MS-65 versions of many older rarities are either thinly traded or just not widely available.
There's a lot more data on that in "Profitable Coin Collecting," a 264 page color-chart and photos book published this past July 20 by Krause Publications ($19.99, available through the trade and through Amazon and Barnes & Noble).
A total of 20 different individual coin types were included in the Salomon Brothers examination, none of them gold, most of them subsidiary coinage (dimes, quarters and half dollars), some of them minor coinage (half cent through three cent nickel), and a couple of silver dollars and a commemorative half dollar (old style).
Each is broadly representative of a class of coins, or a type that is widely collected and hence easy to value, even if the individual coin date and condition is not easily replicated. For example, an 1876 20-cent piece in uncirculated condition is approximately the same as an 1875 20 -cent piece and even an 1875-S.
A 1795 draped bust dollar is similar to the 1796 or even the 1797 or 1798 silver dollar.
Mintages and scarcity vary, but overall trends can be followed with reasonable adjustments. The coins were initially selected for Salomon Brothers by Stack's, the well known New York coin dealer, and were designed so that if, for example, an 1873 two-cent piece in proof is not seen on the auction market or in over-the-counter trading, then an 1871 or even an 1865 (with adjustments) can be substituted to check on the appropriate price.
Tracking the coins on a computerized spreadsheet has been done by me for many years. Besides the coins, statistics include a total amount (aggregate) for the coin portfolio and its annual average plus rate of change from year to year; the average price of gold and silver; the CPI and its rate of change; gold's rate of change; the Dow Jones Industrial average and its rate of change and the price of platinum.
All of them in my original reporting went back to 1947; last year, I brought it back to 1938 (except or platinum which I had initially tracked back only until 1978). I recently found good data (government mining sources) that allowed me to value it for charting purposes back first to the late 1930s, then to 1928 - 80 years ago.
Last year I added University of Iowa farmland survey going back more than 25 years on Iowa farmland, replacing the prior U.S. Department of Agriculture statistics for the value per acre of farmland. It appeared in the old Salomon Brothers survey, too, using sporadic interpretive data that I never thought too reliable.
With Professor Duffy's help, I managed to get solid data back to 1951 (annual) and then sporadic data back to 1935 - again fine for charting purposes. Duffy then helped me with raw data going back to pre-Depression Iowa, 1928.
About three years ago, I added Moody's "AAA" rated corporate bonds as a point of comparison. I took the time to count, and what all of this means that the current spread sheet has over 3,700 data entry points that analyze a variety of markets. For convenience, this year, some of the charts cover only the last quarter century, from 1979 to the present. Standard & Poors, which once started in 1957, now also goes back to 1928.
There are no secrets about this; when you chart gold, there's not a lot of movement between 1934 and 1968 - a $35 an ounce rate was enforced by the government's purchase and sale program and by a prohibition against domestic private gold ownership. The charts are more interesting when looked at over the last 25 or so years when gold or platinum are involved.
Regardless, my index points utilize the same coins that Salomon Brothers did from 1978 to 1990, and about which I have written extensively over that period of time. It also utilizes the same chart and target points -- though expanded -- that I've utilized in more than 40 years of writing about the rare coin market.
Here's an actual example of pricing for a particular coin, the 1794 half cent in XF-40 condition, which shows that rare coins go up, down and sideways - that is, sometimes they don't change from year to year at all. Even with no change, the overall picture over a 68 -year period shows an average annual return of 10.65 percent since 1935 - not bad for a circulated coin with a mintage of over 81,000 pieces.
One obvious flaw in the study is that none of the coins were gold because, as Harvey G. Stack delicately put it, Salomon Brothers was evidently afraid that the price of gold bullion would be too much of an influence that way.
There is some truth to that. A well-respected Market Analyst and New York coin dealer Scott A.. Travers asserted that common date $20 gold pieces, and many others, are wholly bullion driven. I doubted his analysis, but then conducted an extensive analysis over 20 years and concluded that he, Stack, and Salomon were all correct: common-date Saints and bullion are virtually interchangeable.
(It is less true with other denominations, such as a $1 and $3 gold pieces, and certainly not with truly rare coins costing tens of thousands of dollars, or those in gem condition; there, the bullion content is but a minor component of the value).
Comparison of one or more of the coins with the portfolio as a a whole affords an opportunity to compare not only how rare coins compare with the consumer price index and the Dow Jones Industrial average, but other coins as a well - and specific issues like, say, an MS-63 half dollar of 1921 versus an X.F. half cent from 1794, and the coin portfolio average as a a whole.
By 1989, the results were impressive. As a the survey written by Salomon Brothers itself stated, "Conclusion offered: during the succeeding 12-month period of time, rare coins offered a return of more than 30 percent," ranking behind only old masters' paintings and Chinese ceramics. Stocks and bonds were seriously threatened.
If the market basket had been compiled in 1928, it would have cost about $140 to assemble; by 1948 it would have cost about $520 to build the collection. Considering that lawyers were being paid $31 a week to work on Wall Street that year, the sum was not inconsequential.
Fast forward some additional years. In 1956, it went over $1,000 for the first time ($1003)to acquire the portfolio. By 1961, it had increased to $2,168; in 1964 it went over $4,453– not surprising considering the market was fueled for success. By 1974, the number tripled to $13,040, amidst Nixonian inflation.
In 1985, a decade afterwards, it weighed in at $54,800, by 1997 it had increased to $74,810. The price as a of mid-2002 was $104,230 - an increase of about 3.07 percent over the previous year. By 2006, the value of the portfolio was $144,800. It's now at around $187,000 and going strong.
While there's no telling what tomorrow will bring, the charting shows the clear past - and perhaps if trend lines are followed, what the future might bring.
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On September 26, 2008 Bonaparte
On November 6, 2010 clyde mathews
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